What Are Your Thoughts on Note Investing?

[John E.]

Hi everyone! I'm back after a 1 month hiatus from BP (I was busy doing 15 year old stuff). I wanted to know what BPers think of note investing. By this I mean finding a property, acquiring money from private investors at an above market interest rate, and giving a buyer owner financing for an amount higher than what you paid for that is based on comparable rents.

Take For Example this scenario put forth to me by a notes investor...

"A 3 bedroom, 2 bath apartment rents for $950.

You find a home in that area you can buy for what seems like a very
low price.

Let's say you can buy this home for $30,000 and by the time you
include $2,000 to put into your pocket and do a little clean up and
painting you'd be into the house for $40,000.

$40,000 is our BASIS (what we have in the deal).

This is how WE back into a sales price based on the rents:

Take the $950 rent and subtract out the the tax and insurance
expense; what you'd have to pay in taxes and insurance if you owned
a house in the area.

Let's say in this case the taxes were $100/mo and the insurance
would run about $50/mo.
+$950 Rent
-$ 100 Taxes

-$ 50 Insurance

=$ 800

WE see that this tenant can afford to pay $800 for principle +
Interest and by the time they pay another $150 for taxes and
Insurance their payment to own is equal to what they were paying
for rent. So what does that make your sales price?

As luck would have it (or by the terms I chose to use) it's pretty
easy math:

$800 = $80,000 financed amount @ 10.5% for 20 years."

The cash flow seems great, but you build up no equity and don't own the property over the long haul...

Your thoughts?

Thanks in advance,

John Elmenhe

[Jay Hinrichs]

@John E.

that's a sub prime loan that will default at some point. If you have the idea that that will be a solid note...I would advise caution. And if its owner occ like your talking about you have to adhere to all the new rules. which may preclude this renter / owner from actually being able to purchase.

With the new rules more and more people will be life long renters as long as seller carry backs follow the rules that is